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Japan downgrades economy for second month as output sags

[Tokyo] Japan's government cut its overall economic assessment for the second straight month as weak consumption after a sales tax hike in April is causing companies to reduce production.

The government on Tuesday also cut its view on industrial output for the first time in five months as companies produced fewer goods and as inventories piled up due to weak demand.

The dour assessment follows the Bank of Japan's tankan survey earlier this month, which showed that sentiment in the services sector worsened in the third quarter as the economy struggled to shake off the impact of the sales tax hike.

Economists say Japan will probably avoid a recession, but consistently weak consumer spending and manufacturing could fuel speculation Prime Minister Shinzo Abe will delay a second sales tax rise scheduled for next year.

"The Japanese economy is on a moderate recovery, but recently weakness can be seen," the Cabinet Office said in its monthly economic report for October.

That was a downgrade from last month's assessment, which said that weakness was limited to a just a few sectors.

The BOJ is preparing to roughly halve its 1 percent economic growth forecast for this fiscal year at a meeting on Oct 31 but stand by its prediction that inflation will hit its 2 per cent target in the year that begins April 2015.

Many economists have already said the BOJ's consumer price forecasts are too optimistic, and the Cabinet Office's downgrade of the economy is likely to bolster their claims.

The government downgraded industrial production after it fell 1.9 per cent in August as companies made fewer cars and less construction material due to flagging demand after the sales tax rose to 8 per cent from 5 per cent on April 1.

The Cabinet Office stood by its view that the economy can recover in the future because companies expect output to increase in September, they have robust capital expenditure plans and because the labour market remains tight.

Still, there are worries that Mr Abe's government, which is reeling from the resignation of two important cabinet ministers, could delay a second sales tax hike - to 10 per cent - scheduled for October next year.

The tax hikes are needed to cover rising welfare and healthcare spending, but some politicians worry the economy cannot survive another shock without additional stimulus spending. REUTERS